The Economy

Fed Holds Line on Rates Despite Rising Prices

The central bank expects to maintain ultralow rates until “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some...
Matthew HellerMarch 17, 2021

The U.S. Federal Reserve indicated Wednesday that it is not planning to raise ultralow interest rates any time soon, betting that any surge in inflation will be temporary as the economy rebounds from the coronavirus pandemic.

After a two-day meeting, the Fed’s policymaking committee said it “expects to maintain an accommodative stance of monetary policy” with the federal funds rate remaining at zero to 0.25% until “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

“The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals,” it added.

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The Fed slashed interest rates last year in response to the pandemic and, according to Reuters, wants to ensure the “economic wounds” are fully healed before it tightens monetary policy. Just seven of 18 policymakers at this week’s meeting anticipate lifting rates in 2022 or 2023.

“We will continue to provide the economy the support that it needs for as long as it takes,” Fed Chair Jerome Powell told reporters.

The central bank now expects GDP to expand 6.5% in 2021, up from the December forecast of 4.2%, reflecting confidence that the COVID-19 vaccination campaign and the $1.9 trillion relief program will push the economy to its fastest growth since the early 1980s.

The unemployment rate is now seen falling to 4.5% by the end of this year, compared with the projection in June of 6.4%.

According to The Wall Street Journal, “Some economists worry that an impending surge of consumer spending could strain businesses’ ability to meet demand, causing prices to jump.”

The Fed now projects annual inflation accelerating to 2.4% in the fourth quarter of this year and remaining at or slightly above 2% through 2023. But Powell said any pickup in prices this year will likely be temporary.

‘“He’s really just trying to hold the line and say that there’s essentially nothing to see here with respect to inflation,” said Jeremy Stein, a former Fed governor who heads the economics department at Harvard University.